# Financial Smart Contract on Ethereum: can an Ether Futures contract be priced in Ether?

## BACKGROUND

This is more in the wheel-house of economics than programming, but after a few different titles, I thought it best not to skirt around the root of my question OR create a oddly phrased USD based question; when I'm actually asking about Ether. Just briefly, Ethereum is a blockchain network and Ether is the main crypto-currency on it that is used to pay the miners / validators, yada, yada.

Other tokens exist and it's possible to program an arbitrary contract like a financial derivative, but it doesn't have (and cannot have) a tokenized version of a US dollar without someone being able to cheat you if you ask for delivery or lie to you if you just ask for a price-feed. Basically, just like the real world, there's counter-party risk when you have to ask a human to help you or give you information. So the hard part here is getting an accurate picture of the current purchasing power of 1 Ether without simply asking a human to provide you with the current USD:ETH price feed.

## QUESTION

I'm a programmer, not an economist, but crypto-currencies are just ridiculously volatile. I would like to create asset market on Ethereum to help stabilize the value of Ether over the long term. I was thinking that perhaps I could create a contract in the form of "Pay X Ether now to have the option to buy Y Ether in 90 days". Except when I start to walk myself through an example, it doesn't make sense. I think I've structured it wrong and it seems like one side is guaranteed to lose and the other guaranteed to win regardless of whether the objective purchasing power of Ether goes up or down.

Phrased differently, using USD as a more familiar asset, I want to glean information about the current value (purchasing power) of \$1 USD today by creating a derivative of \$1 USD deliverable at some point in the future... without access to anyone's opinion of what the price is other than the current and historical order-book / trades between people of the real asset and the derivative.

The other caveat here is to avoid delivery 'now' for a 'promise' in the future, as that is wide open to theft and 99.99% of participants on Ethereum are anonymous, so no person can be trusted (only the code is trusted to execute as-written).

If I'm way off base with how I've thought the Asset:Derivative pair should work, please provide further guidance or alternatives. Especially real-world examples I can research.

## FOLLOWUP

Later, the intent is that a Market Maker contract will trade both sides of the asset (Ether Vs Ether's long term sentiment) to guarantee high-liquidity and easy price-discovery. The MM assumes only that the further the price is away from the long term mean, the more it should offer to trade at the current spot price, to buy back later when sentiment change back to the other side again. This, I believe will reduce volatility (as measured in purchasing power) given enough liquidity (some double digit % of total market cap locked in it I think would be quite influential).

The MM would:

• Skim profits from traders during high volatility.
• Neither win nor lose during stable periods as volume it offered would be negligible compared to the total assets it held.
• Be susceptible to losses as long term trend could cause the MM to be over committed to one side of the market than the other, expecting a return to mean that never comes.
• Over-sell Ether in a long term bull market and lose out on gains.
• Over-buy Ether in a long term bear market and lose objective purchasing power.
• OK, I'm having some trouble understanding what it is you want to do, exactly. For example, you say "Pay X Ether now to have the option to buy Y Ether in 90 days." When you buy Ether in 90 days, what will you buy it with? Dollars? Gold? Don't say Ethers because that really doesn't make any sense. You could pay X Ethers now for a promise that I will pay you Y Ethers in 90 days. We call that a loan. That makes perfect sense. But you say that isn't what you want. – Bill Dec 14 '16 at 15:14

Futures and Options are all about exchanging something for something else. These kind of derivatives all involve exchanging different 'kinds' of goods so it doesn't make sense to have both sides denominated in the same currency: When you have X Ethereum which you are willing to give up for Y Ethereum later, what you have is a loan. Loans aren't going to do much in terms of managing volatility, which is essentially, how much is Ethereum worth in terms of other stuff.

So the futures contracts needs to be exchanging Ethereum for that other stuff that happens to be volatile relative to Ethereum or vice versa. (could be dollars, could be Bitcoins). Of course since we can't predict the future there will be a winner and a loser. It's the nature of this sort of thing, however supposedly both parties are gaining a loss of volatility.

If you want to manage the downside, you can structure it as an option. An example of this would be, You pay \$1 now to have the right to exchange \$300 for 1 Ethereum in 90 days. (or vice versa). If the Ethereum ends up being worth more than \$301 then you end up winning on that deal, and if Ethereum ends up being worth less than \$301, you don't buy it. This benefits both parties: The person selling the option gets \$1 either way, and if Ethereum drops the purchaser of the option doesnt't lose more than \$1. This type of option is called a 'call option'. If structured the opposite way (you pay \$1 for the right to exchange 1 Ethereum for \$300 in 90 days) then the opposite happens: you 'win' if Ethereum drops below \$299, and you don't exercise the option if Ethereum rises in value, in which case you're simply out \$1. This is called a 'put option'.

No matter what, there will be a winner and a loser come the time to exercise the option. This is inevitable. However, the big idea is that the buyer of the option has a certain expectation on the market trend but wants to protect themselves against the opposite trend (in the case of call, fixed loss and unlimited upside, in the case of a put, guaranteed gain if there is downward movement vs. fixed loss if there is upward movement). The opposite side, the side selling the option, makes money off of the fee to purchase the option and is hoping that the volatility works out to less than the cost of the fee.

You are right about fixed futures (where the price and quantity are fixed and there is no option to back out): they will definitely have a winner and a loser. However, both parties get a guaranteed price, and that may be more valuable than any potential gains or losses. For example, say I am a multinational corporation where most of my profits come in USD but have just built a factory in Kenya and have taken out a loan to do so from a local bank. To pay off the loan, I need to guarantee I can get a fixed amount of Kenyan shilling every month, and it may be worth it to set price in USD so I don't have to worry about exchange fluctuations causing the loan to cost more USD than I expect one month, leaving me short; in that case I won't care too much if I lose out on the potential for the USD/Kenyan Shilling rate to move in my favour. Maybe the same thing could apply for someone who has contracts denominated in Ethereum, who knows.

On the other hand, any kind of investment based on expected future trends is just a smarter form of gambling, when you find someone to take the other side of the bet of course someone will win and someone will lose.

Enforceability of such contracts is a separate measure, it would be the same problem for any futures market and ideally that is what contracts, reputation and the rule of law is for.